Budget management in times of pandemic
The Union Budget 2022-23 indicates that the Covid-induced fiscal shock is much less pronounced today than last year. We do not yet have a post-Covid medium-term growth projection for the country. However, if we take the Fifteenth Finance Commission’s growth projection as a benchmark, India’s actual growth performance for the fiscal years 2020-21 and 2021-22 was well above the projections made by the commission. For the 2022-23 financial year, the economy is expected to grow by 11% (at current prices) against 9.5% forecast by the Finance Committee. This improved growth performance also translates into greater revenue mobilization, creating fiscal space for higher spending.
One of the highlights of the budget was the focus on capital investment. However, the financing of these capital investments has several dimensions. Given the savings-investment profile of the economy and the macroeconomic uncertainties due to the pandemic, private and household investments are likely to be reactive to the general economic environment and it is prudent to assume that the decisions of saving and investing may have been seriously affected by the pandemic. But for the government, making capital investments in these uncertain times takes on a much higher priority and is equally essential to achieving a strong and sustainable recovery from the pandemic. Data available through 2019-20, according to National Accounts, shows that gross fixed capital formation by general government (Center and States) increased as a percentage of GDP from 3.48 in 2011-12 to 3 .82 in 2019-20, while other sectors, especially households, the share fell from 15.75 percent to 11.39 percent during the same period.
The fiscal stance adopted in post-pandemic budgets for increased capital spending, including the 2022-23 budget, is expected to further increase the share of general government in overall capital formation. This year’s Union budget foresees an increase in investments of Rs 3.14 lakh crore, compared to the budgeted figures of the previous financial year. However, it is also important to recognize that two-thirds of general government capital expenditure is undertaken by the states and in this context the announcement of the interest-free loans of Rs 1 lakh crore to the states to increase public investment was an important step. The 50-year interest-free loan to the states for the 2022-23 financial year is important for two reasons: first, because it is intended for capital spending, it cannot be diverted to finance the revenue shortfall and therefore has the potential to increase capital expenditure at the state level and, therefore, overall capital expenditure in the country. Second, in the year 2021-22, 13 states had declared a revenue shortfall in their accounts and this lending facility (which exceeds the FRBM limit) can prevent the downside fiscal risk of capital expenditure cuts. at the state level. The priorities for granting this interest-free loan were also indicated in the budget. One of these priorities is the States’ share of the PMGSY contribution from this fund. Given that the states taken together have a higher share of the nation’s public capital expenditure, effectively absorbing this additional borrowing facility will be key to increasing public investment.
With regard to fiscal consolidation, there are three main trends. First, the increase in taxes of Rs 5.71 lakh crore between 2020-21 (the first year of the pandemic) and 2022-23 shows that the fiscal challenges have subsided, but remain present as we navigate the economic recovery. in uncertain times. Second, between 2020-21 and 2022-23 (BE), the reduction in the revenue gap was substantial – from 7.3% to 3.8% of GDP. Third, from a compositional point of view, the revenue deficit continues to represent more than 55% of the budget deficit and the management of such a deficit involves few significant considerations for revenue expenditure, i.e. interest payments and allowance under various central government and central sector sponsored schemes.
The change of allocation within the CSS basket is given great attention after each budget. However, the fundamental point is that the flow of resources to states in the form of CSS is still significant. The overall allowance under the Central and Central Sector (CSS) sponsored schemes as per 2022-23 (BE) is Rs 3.83 lakh crore and the cost of paying Union Government interest is of Rs 9.56 lakh crore. Beyond allocations by scheme, it is also important to view the allocation of CSS as a matter of macro-fiscal management at the Union and State level, particularly as it contributes to high government revenue shortfalls. central and constraining state resources for matching. contribution, thus increasing the States’ deficit.
Overall, the budget deficit for the year 2022-23 is higher than recommended by the Fifteenth Finance Committee. However, if we consider the direction of the consolidation, it is towards a reduction in the public deficit. The post-Covid fiscal consolidation framework is evolving globally and there is pressure on governments to calibrate deficit and debt to respond to the crisis. Although over the medium term the fiscal story is about supporting the recovery, it is also true that there is no “one size fits all” solution to fiscal consolidation and debt sustainability. This remains the most complex part of budget management when focusing on a single year’s budget. The direction of fiscal consolidation rather than a specific quantified path in an unprecedented time like this is probably the most appropriate consideration.
The author is director of the National Institute of Public Finance and Policy. Views are personal